Five Common Questions about Portfolio Financing

Key Takeaways

• Clients often find it beneficial to finance a group or portfolio of cases rather than seeking funding on a single-case basis.

• Portfolio finance is available to companies and law firms, for both plaintiff-side and defense-side litigation.

• Portfolio finance can provide resources for litigation which might not be eligible for funding on a standalone basis, enabling clients to pursue cases, claims, or defenses they might otherwise decline to.

• Litigation portfolios spread risk more efficiently, lower the cost of capital, and often yield better financial outcomes for the client than single-case financing.

Overview

Litigation finance has traditionally involved the funding of a single case, in which a funder provides non-recourse capital to a company or law firm based on the projected outcome. The recipient may use the capital for expenses related to the litigation, or for unrelated activities such as business development or marketing. Single-case funding offers companies and law firms the opportunity to obtain capital, share risk with a third-party (the funder) and avoid paying high legal costs upfront. Since the funding is non-recourse, the recipient of the capital does not have to pay it back if the case does not result in victory.

Many clients with high volume litigation want to obtain those benefits for more than one case, and both companies and law firms now often seek funding based on a group or “portfolio” of cases. Although clients can obtain excellent results from single-case financing, portfolio financing offers access to a larger amount of capital and more effectively spreads litigation risk both across cases and between the client and the funder. Because the risk of any one case is cross-collateralized by the other cases in the portfolio, portfolio financing also lowers the cost of capital for clients—sometimes significantly.

What is a “portfolio”?

A legal finance portfolio usually consists of four of more cases that are being litigated on a full or partial contingency basis. There is no upper limit to how many cases can be grouped into a portfolio and in fact, litigation finance can be used to fund dozens or even hundreds of cases if the claims are meritorious.

Are portfolios only for plaintiff cases?

Cases in a portfolio can be similar or diverse, and can be plaintiff-side, defense-side, or a mix. The portfolio is constructed to optimize risk/return for the group of cases as a whole. A portfolio permits the financing of cases that are too small or too risky to finance on a standalone basis, which can have both financial and strategic advantages for the client.

At what point in litigation can a company or law firm seek funding?

Cases in a portfolio can be at any stage of litigation—from pre-filing through the asset recovery phase.

How can portfolio financing benefit corporations?

Corporate litigation budgets are finite. A company that pays all of its legal expenses out of pocket will often face hard choices between effectively defending legal actions versus asserting claims that matter to the company’s business strategy. Portfolio financing alleviates concerns that cash shortfalls will force a company into sub-optimal litigation decisions.

Litigation portfolios offer all the benefits of single-case funding, along with the additional advantages of scale, diversification, and the opportunity for advanced financial planning.

The process of constructing a portfolio—in collaboration with the funder and outside counsel—encourages companies to think about their legal departments as a risk system that can be analyzed and managed. A funder will diligence and value the portfolio of current and potential cases as a whole—including cases that seem like “long shots” and ones that seem like a “sure thing”. Funders invest the capital needed based on the likely aggregate outcome of the cases. The effect is to permit companies to pursue cases, claims, or strategies that might otherwise be too costly or high-risk for them to implement alone. In some instances, this careful planning and strategic use of finance can make the legal department a profit center—a welcome role reversal for in-house counsel.

Companies can use portfolios to access more capital than would be available on a single-case basis. Because the capital provided can be used for any business purpose, portfolio finance can allow a company with big ambitions but too much litigation to continue to pursue its business growth. In a portfolio finance transaction, funders generally take their return as a multiple of the money they invested rather than as a percentage of a damages award. Capping the funder’s return in this way means that the cost of capital to the client tends to be lower than from other potential sources.

What are the top benefits of portfolio funding for law firms?

For corporations, litigation is a distraction from their core business. For law firms, litigation is their business. But litigation is risky, and lost cases can impact a firm’s reputation, profits and realization rates. Law firms often begin thinking of portfolio financing within a specific practice area or as an offering to key clients where the costs of doing work for one case or set of cases can be cross-subsidized by the recoveries from another.

Law firms are cash-based and have capital needs just like any other business. In today’s environment, firms may find it difficult to consistently maintain their target cash flow as clients pressure them to offer flexible, contingent or other types of alternative fee arrangements. Even if a firm is willing to accommodate these requests in theory, there is a limit to the number of contingency matters a firm can take on or how often it can reduce or defer fees—even for the most favored client. There are also timing issues to manage. A firm may be very confident in the ultimate outcome of a particular fee a year from now, but that’s not helpful in paying expenses today.

Portfolio funding offers firms access to capital to help manage these issues. As with corporations, law firms can use the proceeds from a portfolio deal for any purpose from making payroll to renting new office space or prospecting for new clients. This, in turn, can allow firms to offer more flexible fee arrangements and to develop or strengthen client relationships by offering contingency representation that the firm otherwise could not afford to.

In constructing a portfolio, law firms and funders collaborate in selecting and conducting diligence on cases. The effect of working with the right funder is to gain an objective, third-party partner who can help them think about the risks and rewards of pursuing particular litigation matters.

For innovative client-focused firms who want to establish a more formal relationship with a funder, Validity also has a preferred partnership program that includes education, preferred rates, and a case referral program.